Private investors can for the first time access the high yields available in the commercial mortgage market after the flotation of a £228m fund. Starwood European Real Estate Finance - shares in which start trading on the London Stock Exchange’s main market today - will deliver a 7 per cent dividend yield by lending money against commercial property in the UK and Northern Europe.
Peter Denton, head of European debt at the US real-estate specialist Starwood Capital, says wealth managers, along with institutional multi-asset managers, have been "by far the biggest investors" in the new fund, reflecting its appeal as an income-boosting diversification tool. The initial public offering is the year’s largest after Direct Line, though the amount raised fell short of the initial £350m target.
Starwood, which provided 5 per cent of the equity, is by far the largest of three asset managers that have been trying to raise money for real-estate debt funds. ICG-Longbow, a UK boutique majority owned by the Intermediate Capital Group (ICG), and Cheyne Capital, a hedge-fund group focused on credit, have also been doing the rounds of wealth managers and other institutional investors, but so far with less success. Both have now delayed the closure of their books until after Christmas.
The market opportunity all three have spotted is casued by the contraction of bank lending to property companies. Banks used to provide roughly 95 per cent of the debt used for European commercial real-estate purchases. But they are now under pressure from regulators to increase the capital they hold against property loans, leaving the sector in desperate need of alternative sources of funding.
Insurance companies and bond markets - including, over the past five months, the retail bond trading platform of the London Stock Exchange - have gone some way to filling that void, but only for big real-estate investment trusts (Reits) holding very low-risk assets. Starwood and its peers will lend against higher-yielding stock at higher loan-to-value ratios, allowing them to charge more lucrative margins over Libor and pay big dividends.
This fund is a very welcome addition to the range of property investments available to investors. Such vehicles are already a well-established source of real-estate finance in the US, where they are called “mortgage Reits”. And Starwood is the market leader in this field - the $3.1bn